SPYRIDON REPOUSIS
As I looked out my office window one afternoon, I noticed a tall woman walking with self-confidence down the street. Her hair was dark and wavy, and her black eyes were her most distinct feature. She was wearing a white shirt with a blue skirt and blue leather shoes. When she came a little closer, I could see her sun-tanned skin. This was the first time I saw Jane Lamog.
Jane was the proud mother of a 19-year-old and a 16-year-old. Married for 21 years to a quiet and low-profile man, Jane was pleased when she was promoted to branch manager at Meneo Bank in Aloa, Greece, at the age of 40. Before her work at Meneo, Jane was a clerk in the deposits department of another financial institution.
Although Jane had not graduated from college, she was a smart, hardworking individual who had taken the time to learn Meneo's operations. She was an open-minded and well-loved member of upper management and possessed excellent communication skills. She was the heart and soul of staff meetings and was extremely sociable. However, although she was an attractive, persuasive woman, she looked like she was hiding something behind her dark and mysterious eyes.
Jane strived to increase profits for the bank and was accustomed to working until 10 or 11 at night; she had not taken a vacation during her five-year tenure. Obviously, working under such conditions was not healthy. She could become aggressive with clients who were late on loan payments, and she exercised a killer instinct when she saw profit opportunities. Jane instructed her personnel that loans, deposits and withdrawals should first be authorized by her, even though the loans department and deposits department each had a head officer responsible for their own approvals.
Jane promised her clients the best interest rate and profits, saying "Your money is my money. I handle and invest it with as much care as my own to get the best return at the lowest risk. Plus, you can access your accounts anytime, from anywhere with Internet banking." When I heard her motto, I thought of the James Bond film Casino Royale, where electronic wireless access was used by perpetrators to launder revenues from criminal activity.
Jane's branch was consistently among Meneo's best performing, and people believed that she was working hard in the bank's interest. Every change she implemented or new product she sold resulted in high profits. Other employees were encouraged to emulate her and live up to the example she set.
Meneo Bank was a dynamic financial organization with branches in the Balkan countries and in South Africa. It was founded in 1910 in Greece as a state-owned and state-managed bank. After being privatized in the 1990s, it continuously grew in size, market share, branches, number of employees and services.
After privatization, the company's management developed a strategic plan with the goal of establishing a strong presence in domestic and foreign markets. Following this plan, Meneo Bank acquired a domestic financial institution, Tillicoutry Bank, and took over a controlling interest in Tulli-body Bank and Alva Bank.
Meneo Bank's management's plans may have changed a great deal over the years but its basic position remained quite simple: Initiate money transfers from one person to another. One of Meneo's most closely held secrets was the process for electronic money transfers, and management's efforts to introduce electronic home banking — financial services electronically delivered to the home — repeatedly resulted in massive expenditures and market penetration. The company invested heavily in technology. Information and trading messages flew across financial wires and the Internet, and it was getting easier to involve more people in the varied e-trading possibilities. These services were offered through Meneo's network of branches and through electronic banking (Internet, mobile phone, call centers and ATMs).
When I met Jane, Meneo Bank engaged in financial and banking activities as an institution with international presence and had more than 6,000 employees with a network of more than 800 branches.
I worked for Meneo Bank as a credit officer. One rainy May morning, as I was analyzing a credit proposal and the financial statements of a company, I received an e-mail about a loan application that had been submitted by Jane's branch. When I read the e-mail, I said to myself, "We all need money and loans, but even Billy Lo?" Billy Lo was a wealthy, well-known individual in Jane's town, Aloa, and was frequently featured in the local newspapers.
Two weeks before I received the e-mail, I was visiting Aloa for the weekend and I stopped by Jane's branch to withdraw funds from my account. As I was waiting in line, I easily recognized Billy Lo in line behind me because I had seen his photo in newspapers many times. I overheard him saying, "I invested $300,000 with Jane and, as she promised me, I got a 6 percent return in a month." But there I was, faced with an e-mail and loan application for $200,000 supposedly from Billy. I wondered why he needed a loan when he already had plenty of money and assets. What was happening?
While in Jane's branch I had noticed other suspicious activity. She was behaving very strangely and was on the phone the entire time I was there. At one point she was even speaking on three mobile phones simultaneously, which struck me as odd because branch managers are only supposed to have one business cell phone. Jane had four in total.
I decided to start reviewing the deposit and loan accounts Billy held at Jane's branch, which was easy to do because my office computer had access to that information. When I investigated the financial products in which Jane was investing Billy's money, I realized that about 60 percent of it was invested in government bonds and the rest in stocks.
Then I examined the accounts of three other clients who used Jane's wealth-management service and discovered that Jane was investing the majority of their money in short-term government bonds but promising them the higher rates they could get from long-term government bonds. This was the first red flag for me.
The second red flag came from risky securities and returns. Jane was investing about 40 percent of her clients' money in risky stocks, which usually have higher average returns than bonds. But Jane promised her clients, in written statements (I had seen such documents online), higher constant returns regardless of market changes. This was against any financial theory and was too good to be true. It indicated to me that something fraudulent could be taking place.
I also discovered that Jane was investing clients' money in zero-coupon bonds that paid interest to the clients' bank accounts online every six months. But zero-coupon bonds, which are sold at a deep discount and redeemed at face value, do not make coupon payments (meaning they pay no interest) until the bond matures. This was my third red flag.
Another important red flag for me was Jane's way of life. Her known income was not enough to justify her expensive clothes and the lavish gifts she gave to upper management. She took out the auditors in her branch to high-end restaurants for lunches and to nightclubs on the weekends. But the auditors always said that the branch was free of fraud and operated properly. I was also informed that Jane had an affair with a male manager who helped her further her career and had sway with the auditing department.
People in the bank raved about her achievements and high profits in comparison to other branches. But I believed that there was a dark side to Jane and decided to conduct an unannounced, one-week investigation into the branch's accounts.
I phoned James, an old and trustworthy friend from my university who had a company in Aloa. I asked him his opinion about Jane, and if he had heard any rumors about her. James told me, "Although many professionals believe in her because they earn money on their investments, I do not trust Jane. I heard from a friend in a bank that she has a company abroad and works only for her personal interests." I thanked him and continued my investigation.
Jane had gained her clients' confidence because she delivered on her promises, regardless of how unbelievable they were; her customers made money. So clients trusted her to move funds from their deposit accounts, and they changed their investment portfolios based on her advice. Clients signed all the appropriate documents for the investments, and sometimes even signed blank papers that Jane could later complete on her own. She was offering her clients an interest rate twice as high as that paid by Meneo Bank on both sight and time deposits, and she paid the rate to customers in person or even credited to bank accounts in advance! Meneo Bank offered no deposit product that paid interest in advance; such a practice was certainly unusual.
I also noticed that the number of clients who opened accounts at Jane's branch was twice the average for other locations; her interest rates were a sure-fire way to attract new business. After gathering evidence of her abnormal and potentially fraudulent activity, I decided that it was time to talk to Jane. When I asked her about the double interest some of her clients were receiving, she became upset. She said there must have been a mistake and that she would look into it and correct the problem. That same day I presented the red flags and my evidence to upper management, and by the end of the week they had taken decisive action. Their solution was to remove Jane's branch from my jurisdiction.
People believed that Jane was a good person, and she was loved by upper management because her branch was always among the best in sales, profits and bank products. They didn't think she would commit fraud.
Three years later, the possible fraud in Jane's branch was still being ignored. But then it started to reveal itself decisively after a decline in the stock market and an increase in rumors about usury and fraudulent activities between Jane and the mayor of the town.
My new manager said to me, "I know you found important information about Jane Lamog's activities years ago. It would be good if you could cooperate with auditors and have another look." I returned to Jane's branch, where she was very friendly with me and offered to take me to dinner, an invitation I declined.
During my investigation, I received calls from clients who wanted to check the balance of their online accounts and asked to withdraw their money, but there were no records of many of these customers in the bank's electronic system. I asked them to bring any documentation they had to the branch; all had documents written by Jane declaring the amount they had invested and promising a 6–7 percent return. These were not produced from the official operating system, but from Microsoft Word.
In the end, I realized that Jane was pocketing the money that clients deposited without recording it to the Internet banking system. With this money she paid double interest to other clients. She was keeping separate books in her office, which I found with the help of Vicky, an internal auditor working on the investigation with me. With money from everyday and new depositors, she paid old depositors, creating a classic Ponzi scheme. But Jane had run out of money to pay her clients.
When the new deposits were not enough to pay interest or fulfill the withdrawal needs of clients, she took advantage of the online banking system to take money from one account to pay another: a lapping scheme. I interviewed John Bosackle, who was responsible for the deposits department and had been hired by Jane. He said that Jane always tried to persuade clients not to withdraw their deposits, but instead to capitalize them to avoid payouts. She also began offering more than double returns to keep clients from withdrawing funds. Her customers remained happy until the collapse.
Some clients told me they entrusted their funds to Jane completely because she told them to. She told them they were valued and respected customers who did not need to wait in line at the bank. Clients appreciated that they avoided lines and had more time to do other business.
John Bosackle also told me that Jane instructed the tellers what to do and how much money to credit to accounts. Bosackle, a 28-year-old man with a low profile and no opinion on what occurred in branch, worked as a clerk and did not consider himself to be responsible for protecting the bank's interests. I told him he was wrong and would have problems as a result.
As the scheme grew, it became more difficult to redirect money to cover returns and withdrawals. I understood the crux of the fraud when clients showed me e-mails they had received from the bank. Jane had gained unauthorized access to clients' online bank accounts through the electronic banking system. She had fraudulently discovered personal identification numbers (PINs) of some clients by sending them e-mails that appeared to come from Meneo but were in fact well-crafted phishing e-mails. They told customers there was an error in the online system, and the bank had assigned them temporary PINs. To reset their PINs, they had to respond to Jane's fake e-mail with a new PIN. When clients changed their PINs, they gave Jane access to their bank accounts. I also saw e-mails that clients had received, directing them to a fake Web site that looked exactly like Meneo Bank's Web site.
By acquiring passwords and unauthorized access to about 25 accounts, Jane transferred funds from clients' accounts to her offshore company. Half of the money was sent through SWIFT (an electronic-payment system) to the Isle of Man, where Jane's offshore company was located.
The other half of the money was used to cover withdrawals and usury. The investigation showed that Jane was crediting sight-deposit accounts by providing loans to six clients through the Internet banking function and charging a monthly interest rate of 13–14 percent, which constituted usury. Most deposit clients told me that Jane was offering a 6–7 percent annual interest rate on new deposits — double the market rate and that offered by other financial institutions. However, at the same time she was charging for loans on the black market.
I also discovered fraud with prepaid cards. Following the money flows, I found that Jane was accessing clients' online accounts to transfer their funds to her prepaid cards. The cards are multifunction cards that many clients use to replace several separate credit cards, and are supposedly very secure. Jane credited prepaid cards that she had at Meneo Bank and at other banks with funds from her clients' accounts. She benefited from fast online transactions to transfer money abroad and purchase luxury goods online.
Even the mayor of the town was involved in the usury and unauthorized use of money from loans. We discovered borrowing issued to the town but we could not trace how the funds were used. And not coincidentally, the loans were given by Jane's branch. Separately, the mayor blackmailed businessmen for loans and also to sell their assets to the offshore company in the Isle of Man.
An audit committee scheduled an examination of the town's economic department, but three days before the audit, a man was arrested during the night for trying to set fire to the finance department. The would-be arsonist confessed to sending gasoline and explosives through a mail courier to the manager of the finance department. He even procured keys to the offices so he could sneak in at night, set fire to the delivered parcel and destroyed the evidence he knew the audit team was looking for. Luckily, this scheme was intercepted by the police.
The mayor resigned, was arrested for usury and was sent to prison with many other fraudsters, but due to political interventions on his behalf, he was released before his trial. The trial was later canceled. Other trials associated with the case are still ongoing. The person who tried to burn the town's finance department was sent to prison for five years.
Jane Lamog and John Bosackle were arrested for usury, money laundering, bribery, fraud, theft and blackmail. Bosackle's parents sold all their assets to pay restitution for the fraud and keep their son out of prison, but to no avail. Bosackle was sentenced to five years in prison. Jane is still free, thanks to political interventions, and is awaiting trial although it has been several years since her arrest. Jane's fraud lasted for five years, and the final loss was $60 million. In the end, the bank repaid most of the clients' losses.
After this occurrence, Meneo Bank began requiring all branch managers to sign a document every three months that certifies that all procedures are being followed and that no fraud is taking place. These certifications essentially require branch managers to take personal responsibility for the operations of their branches and prevent them from delegating this responsibility to their subordinates and then claiming ignorance when fraud is uncovered.
The bank also improved measures to protect PINs, reduced the amount of money that an individual may withdraw daily from ATMs and online and released a statement warning customers not to reply to e-mails they receive claiming to be sent by the bank.
Note
Lessons Learned
I learned that unauthorized access to bank accounts is a more dangerous and prevalent threat to clients than I previously thought, and that it needs to be fixed. Unfortunately, the bank learned the hard way — a $60-million loss. I also learned that no single employee should be granted exclusive trust, regardless of the profits he or she produces. On the contrary, high abnormal profits, above and beyond the average, are a red flag that upper management should take into account. I now have a greater appreciation of how important it is to investigate and audit complicated Internet fraud and maintain the chain of custody for all evidence gathered.
Spyridon Repousis, CFE, has an MS in Banking and Finance and is a senior credit officer in a private bank. Mr. Repousis has written seven books about banking, credit policy and finance and has worked in the banking sector for 13 years. He is a PhD candidate and has taught for 10 years as a part-time lecturer at the Technological Educational Institute (a state-owned, higher-educational institute) in Greece.